The November 2009 release of the Canadian Association of Pension Supervisory Authorities’ (CAPSA) consultation paper called The Prudence Standard and the Roles of the Plan Sponsor and Plan Administrator in Pension Plan Funding and Investment (CAPSA Paper) was quickly followed by the federal government’s announcement that the federal investment rules (FIR) would be amended to remove the quantitative limits on real estate and resource income properties.
Previously, a pension plan could hold no more than 5% of its portfolio in a single parcel of real estate or a Canadian resource property, no more than 15% total in Canadian resource properties and no more than 25% total in a combination of real estate and Canadian resource properties. The federal government also indicated that it would be proposing changes with respect to the requirement that a pension plan may not have more than 10% of its assets in any one investment and a general prohibition on investment in the plan sponsor.
Why all these changes? “In a prudent person environment, the quantitative limits in respect of real estate and resource property are considered cumbersome and no longer required,” the government stated in its Regulatory Impact Analysis Statement. However, the 30% concentration limit on ownership of the securities of a single entity remains—also for “prudential reasons.”
As the regulators have moved into this “prudence” environment, those responsible for pension fund investment must pay attention to what, exactly, prudence is. The British court in Cowan v. Scargill, in discussing in which types of investments a pension fund could invest, required a trustee to “take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide….”
For CAPSA, prudence contains the following elements, which plan administrators will recognize as elements of fiduciary duties owed to plan members: “a duty to act prudently and with due diligence when managing the pension fund and its assets, a duty of loyalty to the pension fund and its members and a duty to be fair and even-handed when dealing with competing interests.”
Dual Facets
There appears to be two aspects to prudence. One is the type of investments chosen by a pension fund. The other is the process by which those investment decisions are made.
With respect to the investment strategy of a pension plan, CAPSA points to the principle of diversification as an element of prudence, requiring the “pension fund’s investment portfolio to be suitably diversified and avoid unwarranted risk.” This is consistent with the Office of the Superintendent of Financial Institutions’ (OSFI) position in its guidelines for development of investment policies. OSFI advises that plan administrators should take into account the entire portfolio of assets in conjunction with the purpose and circumstances of the pension plan. This prudent portfolio approach has now solidly been recognized by the changes to the FIR, although, as the 30% rule remains, perhaps not as solidly as some plans would like.
The other aspect of prudence is procedural, with an examination of how pension plan administrators arrive at investment decisions. CAPSA urges fiduciaries to exercise due diligence and to ensure that the proper documentation and governance structure are in place. Recent litigation has shown plan administrators the potential risks of failing to properly document investment procedures and decisions. For example, in R. v. Christophe—the prosecution of a board of trustees for investment irregularities—the court made special disapproving mention of the board’s failure to document its decision-making procedures in the minutes of board meetings and otherwise.
The changes to the FIR, along with the guidelines that will presumably follow the CAPSA Paper, may give plan administrators a little more room to manoeuvre when making investment decisions. However, these changes should also remind administrators that each decision should be well considered, well documented and, yes, prudent. BC
Amanda Darrach is an associate in the pensions and civil litigation groups at Cavalluzzo Hayes Shilton McIntyre & Cornish LLP in Toronto.
adarrach@cavalluzzo.com
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© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the September 2010 edition of BENEFITS CANADA magazine.